Employees Loaded Up on Company Stock

The near-vaporization of Enron Corp.'s 401(k) assets has painfully reminded many employees about the dangers of investing a large portion of their retirement savings in their employer's stock.

A new survey, however, concludes that virtually every plan sponsor — 92 percent, in fact — includes its company stock in its defined contribution pension plan. Indeed, employer stock represents 29 percent of the total defined contribution assets in those plans, with an average total amount of $2.4 billion.

The survey does show that the rules governing contributions, matching, transfer, and trading restrictions are not uniform, however. Nevertheless, as a result of what happened to Enron employees, Congress is mulling major restrictions on the use of company stock in defined contribution plans.

The survey was conducted by the Committee on Investment of Employee Benefit Assets, an affiliate of the Association for Financial Professionals. Other findings of the committee:

Ninety percent of survey participants offer a company match program. Half of them require the full match to be invested in company stock, while 41 percent do not require any of the match to be in company stock.

Of those that require all or part of the match to be invested in company stock, 72 percent place some type of transfer restriction on the company stock match. However, nearly 20 percent of those with restrictions on stock transfers expect to liberalize some or all of these restrictions over the next 12 months.

Forty percent of respondents indicated that their plans had an employee stock ownership plan (ESOP) feature. These plans tended to be larger than plans without such a feature; the average value was more than $7 billion, compared with $3.7 billion. In addition, more than three-quarters of the respondents with an ESOP feature require 100 percent of the match to be in company stock.

Seventy-four percent of respondents who place restrictions on the company stock match use some type of age-dependent rule regarding transfer restrictions. Sixteen percent favor time-dependent diversification rules. Respondents in that group said they require employees to hold their company's stock anywhere from 1 to 10 years. Twenty percent cited "other" transfer policies, such as a combination of age and service requirements, and partial diversification after a period of time.

Defined contribution plans hold a relatively small percentage of outstanding shares of company stock, however. In 72.5 percent of the cases, DC plan holdings account for just 5 percent or less of their company's outstanding shares.

"As fiduciaries for many of the nation's largest pension funds, [committee] members have first-hand knowledge of the issues related to the use of employer stock in 401(k) plans, and how employees and plan sponsors may be affected by proposed changes," says AFP's president and CEO Jim Kaitz. "Any change in law or regulation should be administratively feasible, not create a whole new regulatory regime, nor impose significant costs on plans or their participants."

Fifty of the committee's 120 plan-sponsor members responded to the survey, which was conducted in October 2001. The average market value for 401(k) plans in the survey was $5 billion.